In recent months, Amazon (NASDAQ:AMZN) has made headlines as the company continues to expand its e-commerce retail business across different verticals ranging from transportation & logistics, to grocery stores & physical stores. In an interesting development, Recode reported that Amazon has ventured into the home appliance services space, which could compete with Best Buy‘s (NYSE:BBY) flagship Geek Squad model.
In an earlier note, we analyzed Amazon’s presence in the home improvement and smart home market, and how this recent move could help Amazon gain an even stronger foothold in the space. In this note, we take a look at how Best Buy stands to lose from this development and how much it can be impacted.
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Over the last few months, Amazon has hired a team of technology experts to primarily offer Alexa consultation, product implementation and help pair smart home devices. Although this development largely deals with integrating its own intelligent speaker Echo and complementing voice assistant Alexa with other smart home devices, it could severely threaten Best Buy’s Geek Squad service offerings in the long run.
Over the next few years, the consumer electronics market in the U.S. is forecast to grow at 0.5-1.0% through 2022. This means that with limited growth in the total market, retailers will be primarily fighting for existing market share. Best Buy already has a first mover advantage in the services segment, with around 20,000 Geek Squad agents serving tens of millions of customers annually, according to the company’s estimates. So while it will likely take some time for Amazon to even approach those numbers, over the long run Amazon’s ecosystem could attract not only Best Buy’s in-store customers away from retailer, it could also impact Best Buy’s online sales.
We forecast Best Buy’s revenue per square foot in the U.S. to remain in the $900 range through the end of our forecast period. If the total revenue per square foot for Best Buy U.S. retail outlets falls to around $800 by the end of our forecast period, there could be an 8-10% downside to our $50 price estimate for Best Buy’s stock. After Amazon’s interest in smart home services was made public yesterday, Best Buy’s stock price fell by over 6%, wiping out around $1 billion from its market cap. You can modify the interactive chart to gauge the impact a change in Best Buy’s revenue per square foot can have on our price estimate for the company.
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